Tech Mahindra (TML), formerly Mahindra-British Telecom, was set up as a joint venture between Mahindra & Mahindra and British Telecommunication Plc., a leading Indian provider of IT services and solutions to the telecommunications industry, in 1986. Nasscom ranked TML as the eighth largest Indian IT services company in export revenue in 2005-06.

Traditionally, the focus of TML was on telecommunications service providers (TSPs). But after the acquisition of Axes Technologies in November 2005, the coverage has expanded to telecommunications equipment manufacturers (TEMs) and independent software vendors (ISVs).

The basic service lines that TML currently offers are application, development and maintenance (ADM), solution integration, product engineering and lifecycle management, consulting, managed platforms and managed services and testing. TML provides the solutions to clients, which can be broken down into the following telecommunications-specific offerings: operating support system (OSS); business support systems (BSS); next generation network (NGN); security; embedded solutions; switching, signalling, transmission and access network solutions; network design and engineering; mobility solutions; business process outsourcing (BPO); and business process management (BPM).

TML is headquartered in Pune and has nine development centres in India and one in UK. TML has 16 sales offices across India, Europe, North America, East Asia, Australia, New Zealand and Middle East. Geographically, Europe contributed 77% in FY 2006 (89% in FY2005), US 18% (7%), and rest of world 5% (4%).

End June 2006, TML had a technical employee count of 10,453 employees as against 9,012 end March 2006.

The proceeds of the fresh issue, i.e., excluding the offer for sale by promoters, are intended to be used to set up additional facilities on 96,923 square-metre land at Rajiv Gandhi Infotech Park, Hinjawadi in Pune, to enhance the delivery infrastructure, with a capital expenditure of Rs 198.08 crore. Of this, Rs 10.82 crore has already been used to purchase land through internal accruals.

• TML’s focus is exclusively on the telecommunication industry to service TSPs, TEMs and ISVs. According to Ovum Research, TSPs spent US$ 30.6 billion on software and IT services in 2005 and are expected to increase spending at a compounded annual growth rate (CAGR) of 5.8% to US$ 38.4 billion in 2009. Also, traditionally, TEMs spent approximately 10-15% of their revenue on research and development. According to Datamonitor, TEM revenue is expected to increase from US$ 308 billion in 2005 to US$ 347 billion in 2009 at a CAGR of 3%. TML is in a better position to benefit from this growth in global spending.

• TML has good domain knowledge and offers a wide range of services from the legacy ADM services to modern consulting and testing. This enables clients to get a one-stop shop for all software services required in the telecommunication space.

• TML has a recognised parentage of Mahindra & Mahindra (M&M) and British Telecom (BT). M&M is a widely known brand in India and BT (post-issue equity stake of 32.55%) is the world’s largest telecommunication company.

• TML’s offshore-onsite revenue mix has been improving quarter-on-quarter. The offshore-onsite mix has improved from 37-63 in Q1 of FY 2005 to 62-38 in Q1 of FY2006 and 66-34 in Q1 of FY2007.

• TML had an overall client base of 62 in FY2006, including big names like BT, Alcatel, AT&T, Motorola and Nortel. Most of the relationships (except BT) are young, leaving scope for substantial scaling up. The software and professional services contract with AT&T Services Inc. is effective till 28 December 2009 and is extendable by mutual agreement. The Alcatel contract is effective end October 2008.

• As of Q4 of FY2006, the top client __BT__ constituted 68% of the revenue of TML, the top 5 clients 87%, and the top 10 clients 92%. This percentage is high and there is a risk of weak performance if one of the major clients’ business slows down.
• IT spends in global telecom sector are relatively more volatile and sensitive to economic conditions than in other sectors.

• The operating profit margin is decreasing since the last three quarter, i.e, from 25.9% in Q3 of FY 2006 to 21.8% in Q1 FY 2007. TML has a good offshore-onsite mix and there is not much scope for improvement. Also, the company has a high attrition rate of 17%. There is also shortage in the market of staff with two-three years of experience. This will lead to further pressure on OPM on wage hikes to retain experienced staff.

• The consolidated operating revenue from FY 2002 to FY 2006 grew at a CAGR of 22.7% to Rs 1242.67 crore. Net profit has been volatile, and grew at a CAGR of only 13% to Rs 235.37 crore. For a leading software company, these kinds of growth rates are mediocre.

The trailing twelve-month (TTM) EPS on fully diluted equity after considering the current IPO as well as full conversion of pending ESOPs works out to Rs 23.3. At a price band of Rs 315 – 365, PE works out to 13.5 to 15.7 times. Relevant industry composite TTM PE is 29.8. Due to its over-dependence on one vertical and one client, the scrip will be traded at a discount to the industry. Nevertheless, the offer price leaves scope for appreciation.